As summer departs and autumn enters, the world’s stock markets are in a decidedly negative mood. China’s domestic slowdown, the lack of a rate hike by the US Federal Reserve and ambiguity over the state of the US economy are among the reasons for recent market declines.
China’s domestic economic slowdown combined with a strong US dollar hurts Chinese demand for US products. Weak demand affects a wide range of companies: Proctor and Gamble, Hormel Foods, GE and others. Exposure to China used to be an asset to sales revenues and growth – now it is a liability.
When the US Federal Reserve decided not to hike interest rates on September 17th, stock markets reacted negatively and have slid ever since. Why? Simply put, an interest rate increase shows confidence in the strength of the US economic recovery. As consumers, we have grown accustomed to the Federal Reserve holding interest rates down to encourage borrowing and investment. However, this time, holding off on an increase was interpreted as a vote of no confidence in the economy and weakened the stock market.
Similarly, while lower gasoline prices are positive for consumer’s wallets, they negatively impact oil companies and their economic ecosystem. Unemployment in the oil sector is rising and delayed capital expenditures are hurting oil industry service companies. On the plus side, with oil prices this low, long term value opportunities now exist in a few of the oil company stocks.
We expect a range bound market until the next Federal Reserve meeting on October 27-28th. While a 0.25% increase in the interest rate hardly seems onerous, it is all about the sentiment and outlook for the economy. Markets want to hear the Federal Reserve say “All clear!” and raise the interest rate. Until this uncertainty is resolved, the market will slide around in this current range and lean towards the downside.